Can interest rate hikes stop the property boom? Not a chance: Hotspotting's Terry Ryder

It won’t make any difference unless they deliver four or five rises in the official interest rate in rapid succession, and even then it might not halt the runaway property train.

Can interest rate hikes stop the property boom? Not a chance: Hotspotting's Terry Ryder
Can interest rate hikes stop the property boom? Not a chance: Hotspotting's Terry Ryder

One of mainstream media’s favourite “what if?” scenarios in relation to the nationwide property boom is “what is the RBA changes its mind and lifts interest rates?”.

The answer is: it won’t make any difference unless they deliver four or five rises in the official interest rate in rapid succession. And even then it might not halt the runaway train.

There are two reasons why a rate rise wouldn’t make much of a difference:

  1. The boom hasn’t been caused by low interest rates
  2. History shows that it requires five, six or seven rate rises to douse a hot market.

Economists tend to display their ignorance of real estate dynamics by attributing everything that happens in residential property to the level of interest rates. So, because real estate is booming and interest rates are at record lows, the simplistic economist mind reasons that one must have caused the other.

But, as I outlined in detail in this column in February, there are multiple reasons for the strong up-cycle in the housing market. I have 15 dot points on my list of drivers of this national boom. Low interest rates comprise just one of them.

A change to one of the 15 factors won’t stop the strong market.

Government stimulus measures comprise just one of the 15 factors, so the end of JobKeeper (which is one of numerous stimulus measures) won’t halt the market momentum.

Nor would a rise in the official interest rate. Or two rises. In the past four decades, Australia has had two genuine, prolonged, nationwide property booms: in the late Eighties and in the early Noughties.

During the extraordinary boom at the end of the 1980s, mortgage rates were in double digits but (contrary to economic theory) Australia experienced rapidly rising prices pretty much anywhere. Interest rates kept rising but the boom raged on. Mortgage rates hit 17-18% before the boom stopped.

The boom that prevailed from 2001 to 2004 happened with mortgage rates much higher than now – 7-8%. There were a couple of interest rate rises amid that boom but the momentum was not halted. There were a couple more rate rises in 2004 but by then the boom was already subsiding after three years of big growth. Rate rises were not the cause of the boom ending.

In 2007 and 2008, before the GFC, there were signs of an up-cycle in the housing market. Then we had eight interest rate rises and the onset of the GFC – and the price rises ended.

The GFC inspired massive Federal Government stimulus measures, including major assistance for first-home buyers, plus six rapid-fire interest rate increases. As a result of the combination of those factors, prices rose in strongly in 2009 and 2010. Then we saw seven interest rate increases in a short period.

Since 2011 we have had 18 reductions in the official interest rate but, until recently, no sign of a nationwide real estate boom. In that period, we saw big price growth in Sydney and Melbourne 2013 to 2017, but that did not happen elsewhere. Amid that period of very low and falling interest rates, many of our major markets, including Perth and Darwin, had steadily falling house prices.

The message from analysing property prices and interest rate changes is that it’s only in periods of multiple changes to rates to rapid succession that we see markets apparently reacting – but the influence of interest rates is unclear because there are other major factors in play at the same time.

Terry Ryder

Terry Ryder

Terry Ryder is the founder of hotspotting.com.au.

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2021 Property Boom Interest Rates Rate Hike

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